I'm With Hal: Scale Won't Help MicroHoo

by Kaila Colbin, Aug 18, 2009, 1:14 PM

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I had the privilege of hearing Hal Varian, Google's Chief Economist, speak last March. He wasn't dramatic or flamboyant, just refreshingly straight-shooting. At the time, I particularly appreciated that his flavor of economics included observations about human behavior. He pointed out, for example, that most people aren't really concerned about privacy when it comes to intended use of their data ("We will use this data to make our search engine better"), but we are concerned about unintended use of our data ("Oops! Did I just reveal that you've got questionable taste in lingerie?"). The issue, therefore, is not one of privacy but one of security.

 

That was six months ago. He further confirmed my positive impression two days ago, when he came out in an interview with CNET's Tom Krazit calling Microsoft's scale argument "bogus."

In case you missed it, here's the crux of the story: Microsoft claimed that their search deal with Yahoo gives them the scale necessary to compete with Google. Varian says that's rubbish, in a few different ways. Here's one: "[T]here's a small statistical point that the accuracy with which you can measure things as they go up is the square root of the sample size. So there's a kind of natural diminishing returns to scale just because of statistics: you have to have four times as big a sample to get twice as good an estimate."

You don't have to be an economist to appreciate that. Do we really think that Microsoft's scale prior to this deal is what was holding them back in the search wars? Has Yahoo's problem all along been how tiny they are? If so, somebody'd better tell Charles Knight and his 1,000 alternate search engines (which combined make up only a few percent of the overall market) that they don't stand a chance.

Lest you think I've drunk the Varian Kool-Aid, I disagree with his next comment: "[I]t's not the quantity or quality of the ingredients that make a difference, it's the recipes. We think we're where we are today because we've got better recipes and we have better recipes because we spent 10 years working on search improving the performance of the algorithm.

"Maybe I'm pushing this metaphor farther than it should go, but I also think we have a better kitchen. We've put a lot of effort into building a really powerful infrastructure at Google, the development environment at Google is very good."

So it's not the scale. Scale is a barrier for the minnows, but it's not what makes the difference between Google and MicroHoo. And at this stage, it's not the recipes either -- although the recipes were definitely a core part of how we got here.

So what is it, then? What is it that keeps people feeding at the trough of the Big G?

The answer is simple: as far as the majority of the searching population goes, that problem is solved.

You got scale? So what? That problem is solved. You got better recipes? Tell somebody who cares --- that problem is solved. With all the problems I got, I'm not spending a minute on a problem I've already solved.

Varian may be no more right than Ballmer, but, then again, his team is winning. He can afford to be wrong.

On another note, I leave this Saturday to get married! So I'll see you in a month. Have fun without me!

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